Introduction to Business Management

Lecture 4: Organizational Structure

Learning OutcomesFollow this Learning Outline as you read and study this chapter.

1 Designing Organizational Structure

• Discuss the traditional and contemporary views of work

specialization, chain of command, and span of control.

• Describe each of the five forms of departmentalization.

• Differentiate authority, responsibility, and unity of command.

• Explain how centralization–decentralization and formalization

are used in organizational design.

Learning Outcomes

2 Mechanistic and Organic Structures

• Contrast mechanistic and organic organizations.

• Explain the contingency factors that affect organizational

design.

3 Common Organizational Designs

• Contrast the three traditional organizational designs.

• Describe the contemporary organizational designs.

• Discuss the organizational design challenges that managers

face today.

Designing Organizational

Structure

1. Discuss the traditional and contemporary views of work

specialization, chain of command, and span of control.

2. Describe each of the five forms of departmentalization.

3. Differentiate authority, responsibility, and unity of command.

4. Explain how centralization–decentralization and formalization

are used in organizational design.

Designing Organizational Structure

Organizing

• Arranging and structuring work to accomplish an organization’s

goals.

Organizational Structure

• The formal arrangement of jobs within an organization.

Designing Organizational Structure (cont’d)

Organizational Design

• A process involving decisions about six key elements:

Work specialization

Departmentalization

Chain of command

Span of control

Centralization and decentralization

Formalization

Exhibit 1 Purposes of Organizing

• Divides work to be done into specific jobs and departments.

• Assigns tasks and responsibilities associated with individual jobs.

• Coordinates diverse organizational tasks.

• Clusters jobs into units.

• Establishes relationships among individuals, groups, and

departments.

• Establishes formal lines of authority.

• Allocates and deploys organizational resources.

Work Specialization

• The degree to which tasks in the organization are divided into

separate jobs with each step completed by a different person.

• Overspecialization can result in human diseconomies from

boredom, fatigue, stress, poor quality, increased absenteeism, and

higher turnover.

Departmentalization by Type

Functional

• Grouping jobs by functions performed

Geographical

• Grouping jobs on the basis of territory or geography

Product

• Grouping jobs by product line

Process

• Grouping jobs on the basis of product or customer flow

Customer

• Grouping jobs by type of customer and needs

Exhibit 2 The Five Common Forms of Departmentalization: Functional

Exhibit 2 The Five Common Forms of Departmentalization: Geographical

Exhibit 2 The Five Common Forms of Departmentalization: Product

Exhibit 2 The Five Common Forms of Departmentalization: Process

Exhibit 2 The Five Common Forms of Departmentalization: Customer

Chain of Command

• The continuous line of authority that extends from upper levels of

an organization to the lowest levels of the organization and clarifies

who reports to whom.

Chain of Command (cont’d)

Authority

• The rights inherent in a managerial position to tell people what to

do and to expect them to do it.

Responsibility

• The obligation or expectation to perform.

Unity of Command

• The concept that a person should have one boss and should report

only to that person.

Span of Control

• The number of employees who can be effectively and efficiently

supervised by a manager.

• Width of span is affected by:

Skills and abilities of the manager

Employee characteristics

Characteristics of the work being done

Similarity and complexity of tasks

Physical proximity of subordinates

Standardization of tasks

Sophistication of the organization’s information system

Strength of the organization’s culture

Preferred style of the manager

Exhibit 3 Contrasting Spans of Control

Organizational Structure (cont’d)

Centralization

• The degree to which decision making is concentrated at upper

levels in the organization.

Organizations in which top managers make all the decisions and

lower-level employees simply carry out those orders.

Decentralization

• Organizations in which decision making is pushed down to the

managers who are closest to the action.

Employee Empowerment

• Increasing the decision-making authority (power) of employees.

Exhibit 4 Factors that Influence the Amount of Centralization

More Centralization

• Environment is stable.

• Lower-level managers are not as capable or experienced at making

decisions as upper-level managers.

• Lower-level managers do not want to have a say in decisions.

• Decisions are relatively minor.

• Organization is facing a crisis or the risk of company failure.

• Company is large.

• Effective implementation of company strategies depends on

managers retaining say over what happens.

Exhibit 4 Factors that Influence the Amount of Decentralization

More Decentralization

• Environment is complex, uncertain.

• Lower-level managers are capable and experienced at making

decisions.

• Lower-level managers want a voice in decisions.

• Decisions are significant.

• Corporate culture is open to allowing managers to have a say in

what happens.

• Company is geographically dispersed.

• Effective implementation of company strategies depends on

managers having involvement and flexibility to make decisions.

Formalization

• The degree to which jobs within the organization are standardized

and the extent to which employee behavior is guided by rules and

procedures.

Highly formalized jobs offer little discretion over what is to be

done.

Low formalization means fewer constraints on how employees do

their work.

Mechanistic and Organic

Structures

1. Contrast the two models of Organizational Design:

mechanistic and organic organizations.

2. Explain the contingency factors that affect organizational

design.

Strategy and Structure

Size and Structure

Technology and Structure

Environmental Uncertainty and Structure

Exhibit 5 Mechanistic Vs. Organic Organization

• High specialization

• Rigid departmentalization

• Clear chain of command

• Narrow spans of control

• Centralization

• High formalization

• Cross-functional teams

• Cross-hierarchical teams

• Free flow of information

• Wide spans of control

• Decentralization

• Low formalization

Contingency Factors

Strategy and Structure

• Achievement of strategic goals is facilitated by changes in

organizational structure that accommodate and support change.

• Organizational structure follows strategy.

Size and Structure

• As an organization grows larger, its structure tends to change from

organic to mechanistic with increased specialization,

departmentalization, centralization, and rules and regulations.

Contingency Factors (cont’d)

Technology and Structure

• Organizations adapt their structures to their technology.

• Woodward’s classification of firms based on the complexity of the

technology employed:

Unit production of single units or small batches

Mass production of large batches of output

Process production in continuous process of outputs

• Routine technology = mechanistic organizations

• Non-routine technology = organic organizations

Exhibit 6 Woodward’s Findings on Technology, Structure, and Effectiveness

Contingency Factors (cont’d)

Environmental Uncertainty and Structure

• Mechanistic organizational structures tend to be most effective in

stable and simple environments.

• The flexibility of organic organizational structures is better suited

for dynamic and complex environments.

Strategy Frameworks

• Innovation

– Pursuing competitive advantage through meaningful and unique

innovations favors an organic structuring.

• Cost minimization

– Focusing on tightly controlling costs requires a mechanistic

structure for the organization.

Common Organizational

Designs

1. Contrast the three traditional organizational designs.

‒ Simple structure

‒ Functional structure

‒ Divisional structure

2. Describe the contemporary organizational designs.

‒ Team Structures

‒ Matrix and Project Structures

‒ The Boundaryless Organization

3. Discuss the organizational design challenges that managers

face today.

Traditional Designs

• Simple structure

Low departmentalization, wide spans of control, centralized

authority, little formalization

• Functional structure

Departmentalization by function

Operations, finance, marketing, human resources, and product

research and development

• Divisional structure

Composed of separate business units or divisions with limited

autonomy under the coordination and control of the parent

corporation.

Exhibit 7 Strengths and Weaknesses of Traditional Organizational Designs

Exhibit 8 Contemporary Organizational Designs

Team Structure

• What is it? A structure in which the entire organization is made up of work

groups or teams.

• Advantages: Employees are more involved and empowered. Reduced barriers

among functional areas.

• Disadvantages: No clear chain of command. Pressure on teams to perform.

Matrix-Project Structure

• What is it? A structure that assigns specialists from different functional

areas to work on projects but who return to their areas when

the project is completed. Project is a structure in which

employees continuously work on projects. As one project is

completed, employees move on to the next project.

• Advantages: Fluid and flexible design that can respond to environmental

changes. Faster decision making.

• Disadvantages: Complexity of assigning people to projects. Task and personality

conflicts.

Exhibit 8 Contemporary Organizational Designs

Boundaryless Structure

• What is it? A structure that is not defined by or limited to artificial horizontal,

vertical, or external boundaries; includes virtual and network

types of organizations.

• Advantages: Highly flexible and responsive. Draws on talent wherever it’s

found.

• Disadvantages: Lack of control. Communication difficulties.

Contemporary Organizational Designs

• Team structures

The entire organization is made up of work groups or self-

managed teams of empowered employees.

• Matrix and project structures

Specialists from different functional departments are assigned to

work on projects led by project managers.

Matrix and project participants have two managers.

In project structures, employees work continuously on projects;

moving on to another project as each project is completed.

Contemporary Organizational Designs

• Boundaryless Organization

A flexible and unstructured organizational design that is intended

to break down external barriers between the organization and its

customers and suppliers.

Removes internal (horizontal) boundaries:

‒ Eliminates the chain of command

‒ Has limitless spans of control

‒ Uses empowered teams rather than departments

Eliminates external boundaries:

‒ Uses virtual, network, and modular organizational structures to

get closer to stakeholders.

Removing External Boundaries

Virtual Organization

• An organization that consists of a small core of full-time employees

and that temporarily hires specialists to work on opportunities that

arise.

Network Organization

• A small core organization that outsources its major business

functions (e.g., manufacturing) in order to concentrate on what it

does best.

Modular Organization

• A manufacturing organization that uses outside suppliers to provide

product components for its final assembly operations.

Today’s Organizational Design Challenges

1. Keeping Employees Connected

2. Building a Learning Organization

3. Managing Global Structural Issues

Keeping Employees Connected

• Earlier organizational design concepts were developed assuming:

predictable and constant work tasks

full time jobs

jobs continued indefinitely

work done at an employer’s place of business, and

under a manager’s supervision.

• A major structural design challenge for managers is finding a way to

keep widely dispersed and mobile employees connected to the

organization.

Building a Learning Organization

• An organization that has developed the capacity to continuously

learn, adapt, and change through the practice of knowledge

management by employees.

• Characteristics of a learning organization:

An open team-based organization design that empowers

employees.

Extensive and open information sharing.

Leadership that provides a shared vision of the organization’s

future.

A strong culture of shared values, trust, openness, and a

sense of community.

Managing Global Structural Issues

• Structures and strategies of organizations worldwide are similar,

“while the behavior within them is maintaining its cultural

uniqueness.”. Managers may need to think about the cultural

implications of certain design elements.

Key Terms

organizing المنظمة span of control مدى السيطرة

organizational structure الهيكل التنظيمي centralization المركزية

organizational chart الهيكل التنظيمي decentralization الالمركزية

organizational design التصميم التنظيمي employee empowerment تمكين الموظف

work specialization تخصص العمل formalization إضفاء الطابع الرسمي

departmentalization التشعيب mechanistic organization منظمة الميكانيكية

cross-functional teams ةفرق الصليب وظيفي organic organization منظمة العضوية

chain of command سلسلة القيادة unit production إنتاج وحدة

authority السلطة mass production اإلنتاج الضخم

responsibility المسؤولية process production عملية اإلنتاج

unity of command وحدة القيادة simple structure بنية بسيطة

functional structure الهيكل الوظيفي virtual organization منظمة افتراضية

divisional structure هيكل الشعب network organization تنظيم الشبكة

team structure هيكل الفريق learning organization منظمة تعليمية

matrix structure هيكل المصفوفة

project structure بنية المشروع